Plan Retirement? I’d rather wash a cat!
A clever ad agency created a commercial for Nationwide Insurance about retirement planning entitled “Two Up.”1 When “retirement planning” was mentioned by a couple at breakfast, they leapt into action cleaning the oven, cleaning the gutters, washing the family pets, eventually pressure washing the roses & pretending to aerate the lawn. The commercial is effective because it is based in reality. Retirement Planning is notably confusing. With more than 10,000 strategies for claiming Social Security alone, washing a cat appears strikingly attractive!
The Cavalry to the Rescue!
A number of years ago, the mutual fund industry recognized an existing dilemma. Though individuals were surrounded by and were participating in retirement vehicles (e.g. IRA, 401(k), 403(b), Roth IRA, etc.), much of the money was being directed to low-growth or no growth options. People had concluded they had too little time and expertise to deal with investment decisions. Enter the Target Date Funds designed to bring clarity and simplicity to the tangled web of investments. Fidelity describes their “Freedom Funds” as options helping, “Take the guesswork out of building and maintaining an age-based retirement portfolio.”2 Vanguard states, “Target Retirement Funds give you a straightforward approach to a sophisticated problem.”3 The process is uncomplicated. The investor chooses a target date fund coinciding with the number of years remaining until retirement, then (as American Funds describes the process) “The fund normally invests a greater portion of its assets in bond, equity income and balanced funds as it approaches and passes its target date.”4 Problem solved, right?
If you accidentally hold the map upside down…
Everyone had the best intentions. The Fund Advisors wanted the best for the investors, and the investors wanted their autopilot to find the smoothest skies as they flew to their chosen destination. Unfortunately a March 2016 survey by Financial Engines found that virtually 75% of investors were not using Target Date Funds as they were intended.5 Sixty-two percent of those investing in TDFs limited the amount they invested to avoid “putting all their eggs in one basket,” not understanding the concept that their investment would be spread among several already diversified funds.6 Nevin E. Adams, writing for napa-net.org also notes from another study a serious misconception that target-date funds are guaranteed. More than one-third believe the year listed in the fund name means their accounts are guaranteed to be sufficiently funded in that year.7 While both the fund advisor and investor may have the same destination in mind, they are neither in the same vehicle nor traveling in the same direction.
Own It!
When it comes to planning for our retirement (or planning for anything really), we have to remember that the desired destination and the road we travel is our responsibility. We may hope for an opportunity to hand over the keys to our financial future to someone else while we go wash the cat, but that will not work out well! The popular terminology is, “Own It.” It is our retirement. The funds invested are ours. The dreams are ours. The risk tolerances are ours. There are opportunities and methods by which the process may be simplified, but assigning it to someone else is dangerous.
1 https://www.youtube.com/watch?v=TDKMNpCF8mQ
2 https://www.fidelity.com/mutual-funds/fidelity-fund-portfolios/freedom-funds
3 https://investor.vanguard.com/mutual-funds/target-retirement/#/
4 http://money.usnews.com/funds/mutual-funds/target-date-2030/american-funds-2030-trgt-date-retire-fd/aaetx
5 https://financialengines.com/docs/financial-engines-tdf-report-022916.pdf
6 Financial Engines. op. cit. Page 3
7 http://www.napa-net.org/news/plan-optimization/target-date-funds/target-date-fund-misperceptions-abound/